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GECC, CIT: Good cap, bad cap? Print E-mail
Wednesday, 22 July 2009
By John Goff
What a difference a day makes.
On Tuesday (actually, late on Monday, but hey, a concept's a concept) embattled financial services giant CIT announced that it had lined up $3 billion in emergency funding. Also on Tuesday, Barclay's Capital downgraded its rating on GE Capital Corp.'s debt, based on its inadequate loan loss reserves. Barclay's analysts wrote: "GECC's ratio is among the worst in the financial services sector."
But hold the phone. Just a day later, parent General Electric said it has gotten the okay to exit early from the government's Temporary Liquidity Guarantee Program. That little bombshell came on the heels of a fresh warning from CIT. The financial services company cautioned that despite it's $3 billion emergency loan, it may still end up in Chapter 11— if its bondholders don't play ball.
Indeed, CIT is trying to get lenders to take 82.5 cents on the dollar for roughly $1 billion of floating-rate senior notes that mature in mid-August. According to an 8-K filing with the SEC, CIT warned that "existing liquidity for the same period is not sufficient to make the upcoming August 17, 2009 maturity payment on the August 17 Notes…"
CIT estimates its funding needs for the year (ending June 30, 2010) include $7 billion of unsecured debt. CIT reportedly has close to $40 billion in long-term debt.
In addition, Moody's placed some of CIT's receivable-backed notes under review for possible downgrade. Further, CIT's management also indicated the financial services company may report a loss of more than $1.5 billion in the second quarter.
Scary stuff for a company that has about one million customers, many of them small-to-medium sized businesses. It remains to be seen what they do if CIT files for Chapter 11 protection. But you can bet mid-sized retailers and other smaller businesses will be slammed by a CIT bankruptcy.
Meanwhile, on the sunny side of the planet, GE said the FDIC has approved its plan to move GE Cap out of the TLGP ahead of that facility's expiration in October. In fact, it appears that GE Cap will be able to prefund its 2010 long-term debt issuance program before the end of this year.
Moreover, the financial services giant indicated it has pared its commercial paper balance dramatically. The company has reduced that balance from around $100 billion in 2008 to $50 billion at the end of the second quarter of 2009. That, too, came ahead of schedule.
In a statement, GE Treasurer Kathryn Cassiday said: "Today's plan to exit from TLGP affirms the strength of GE Capital's funding and liquidity position, including reduced reliance on government funding programs and our ability to access non-guaranteed debt markets."
Sounds encouraging. Meanwhile, Microsoft announced that it has terminated a vendor-financing deal with CIT.
"These guys aren't out of the woods yet," Christopher Munck, a high-yield bond trader at B. Riley & Co told Reuters. "And I don't think anybody believes they are."


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